The Sanctity of AIG's Contracts

Larry Summers, Sunday, on AIG's payment of executive bonuses:

We
are a country of law. There are contracts. The government cannot just
abrogate contracts. Every legal step possible to limit those bonuses is
being taken by Secretary Geithner and by the Federal Reserve system.

Associated Press, February 18, 2009:

The
United Auto Workers' deal with Detroit's three automakers limits
overtime, changes work rules, cuts lump-sum cash bonuses and gets rid
of cost-of-living pay raises to help reduce the companies' labor costs,
people briefed on the agreement said today.

The UAW
announced Tuesday that it reached the tentative agreement with General
Motors Corp., Chrysler LLC and Ford Motor Co. over contract concessions,
as GM and Chrysler sent plans to the Treasury Department asking for a
total of $39 billion in government financing to help them survive.

Concessions with the union are a condition of the $17.4 billion in government loans that the automakers have received so far.

Apparently,
the supreme sanctity of employment contracts applies only to some types
of employees but not others. Either way, the Obama administration's
claim that nothing could be done about the AIG bonuses because AIG has
solid, sacred contractual commitments to pay them is, for so many
reasons, absurd on its face.

As any lawyer knows, there are few
things more common - or easier -- than finding legal arguments that
call into question the meaning and validity of contracts. Every day,
commercial courts are filled with litigations between parties to
seemingly clear-cut agreements. Particularly in circumstances as
extreme as these, there are a litany of arguments and legal strategies
that any lawyer would immediately recognize to bestow AIG with leverage
either to be able to avoid these sleazy payments or force substantial
concessions.

Since the contracts are secret and we're apparently
just supposed to rely on the claims of AIG and Treasury Department
lawyers, it's impossible to identify these arguments specifically. But
there are almost certainly viable claims to be asserted that the
contracts were induced via fraud or that the bonus-demanding executives
themselves violated their contracts. Independently, it's inconceivable
that there aren't substantial counterclaims that AIG could assert
against any executives suing to obtain these bonuses, a threat which,
by itself, provides substantial leverage to compel meaningful
concessions. Many of these executives were, after all, the very ones
responsible for the cataclysmic losses.

The only way a company
like AIG throws up its hands from the start and announces that there is
simply nothing to be done is if they are eager to make these
payments. One might expect AIG to do so -- they haven't exactly proven
themselves to be paragons of business ethics -- but the fact that Obama
officials are also insisting that nothing can be done (even while
symbolically and pointlessly pretending to join in the populist outrage
over these publicly-funded "retention payments") is what is most
notable here.

Legal strategies aside, just as a business matter,
one of the first things which every compnay in severe distress does is
go to its creditors, explain that it cannot make the required payments,
and force re-negotiations of the terms. That's as basic as it gets.
To see how that works, just look at what GM and other automakers did
with their union contracts - what they were forced by the Government to
do as a condition for their bailout. Obviously, if a company goes into
bankruptcy, then contracts to pay executive bonuses are immediately
nullified, but the threat of bankruptcy or serious financial distress
is, for obvious reasons, very compelling leverage to force substantial
concessions. And the idea that, in this economy, AIG executives (of all
people) will be able simply to leave and go seek employment elsewhere
unless they receive their "retention bonuses" (even assuming that's an
undesirable outcome) is nothing short of ludicrous.

There may be
other reasons why the Treasury Department decided it wanted AIG to pay
these bonuses (Marcy Wheeler considers some of those reasons here),
but this claim from Larry Summers that the sanctity of contracts
precludes any alternatives is not just false, but insultingly so. It's
difficult to recall anything quite so vile as watching hundreds of
millions of dollars in taxpayer money flow to AIG executives. One
would expect the Obama administration to do everything possible to
prevent that from happening. Instead, they seem to be doing the
opposite.

UPDATE: Jane Hamsher has more here on AIG's insultingly frivolous claims as to why these contract obligations are unavoidable, and here FDL has a petition,
to be delivered to the House Financial Services Committee during
Wednesday's hearing on the AIG payments, demanding full disclosure
before any more payments are made.

On a related note, could someone please reconcile Larry Summers emphatic declaration that "we are a country of laws" with this:

To
use Larry Summer's eloquent phrase (perversely deployed to justify the
AIG bonus payments): if "we are a country of law," we would probably
do something about these severe violations of law that are right in
front of our faces, particularly since we all know exactly who the lawbreakers are.

Apparently,
this "we are a country of law" concept means that hundreds of millions
of dollars in taxpayer money must be transferred to the AIG executives
who virtually destroyed the financial system, but it does not mean that
something must be done when high government officials get caught
plainly breaking the law. What an oddly selective application of the
"rule of law" this is.